Wall Street Mini-Tax Could Raise Maxi Revenue

by Ronald M. Glassman and Gerald E. Scorse / March 6th, 2019

With great fanfare, politicians on the left are thinking big on tax reform: a 70 percent rate on incomes over $10 million, a wealth tax on the super-rich, estate taxes as high as 77 percent. With no fanfare at all, the nonpartisan Congressional Budget Office (CBO) has made the case for thinking small. According to the CBO, a mini-tax on sales of stocks, bonds and other holdings could boost revenues by scores of billions a year.

The estimate came in December 2018 when the CBO released its list of options for cutting the federal deficit. For the period 2019-2028, a Wall Street tax of 0.1 percent would bring an extra $777 billion into the Treasury. Market declines were predicted early on, along with lower capital gains and lower trading volumes. Even so, after factoring in all the headwinds, the tax still produced average annual revenue increases of almost $78 billion. The numbers rose as the years went by: the inflow totaled $534.5 billion in the closing half-decade, compared to $242.2 billion from 2019-2023.

Such a levy would instantly become the single biggest non-income tax on wealth in America. Five days a week and after-hours, the financial markets execute millions of trades involving billions of shares. The huge majority belongs to taxpayers in the upper rungs. Given the volume and the value of the trades, even a tiny tax would generate giant revenues. The Institute for Policy Studies, in a Q&A on the tax, said the burden “would fall overwhelmingly on short-term speculators. For most pension funds and traditional stock-and-bond-holders, the cost would be negligible—in fact less than typical portfolio management fees.”

A detailed analysis of FTTs by the Tax Policy Center was published in 2016. The study looked at the arguments pro and con, and there were plenty of both. For opponents, the tax was “an answer in search of a question.” It would “curb productive trading…reduce market liquidity, raise the cost of capital, and discourage investment.” If you want more, “It could also cause prices to adjust less rapidly to new information.”

For proponents, the upsides included less “speculative short-term and high-frequency trading,” less volatility, and fewer bubbles. Payback was part of the argument too: It “could help recoup the costs of the [2009] financial-sector bailout as well as the costs the financial crisis imposed on the rest of the country.” From this sprang the nickname, the “Robin Hood Tax.”

The name fits—but Robin never took from the rich on a scale so small and yet so large. The study concluded that a tax of 0.34 percent “could raise a maximum of about 0.4 percent of GDP ($75 billion in 2017) in a highly progressive manner.” Note that the 0.34 percent rate more than triples the CBO’s 0.1 percent, but brings in no more revenue. The reason is tax evasion, which rises as the rate increases; the increases can ultimately lose more revenue through evasion than they gain. Nonetheless, the tax is clearly a fiscal policy bonanza.

If it again becomes law, said the Center, the bonus billions could be used “to benefit the poor, finance future financial bailouts, cut other taxes, or reduce public debt.” The last option, of course, is how the CBO was spending the money. There’s no lack of other possible uses, including sorely-needed infrastructure repairs or restoring free tuition to public colleges and universities.

Even the right gets something to love with a FTT. Here’s the Tax Foundation in February of 2018, praising sales taxes and their superiority to income taxes: “Retail sales taxes are one of the more transparent ways to collect tax revenue. While graduated income tax rates and brackets are complex and confusing to many taxpayers, sales taxes are easier to understand; consumers can see their tax burden printed directly on their receipts” (in this case, directly on their financial transactions receipts).

In the newest news, Sen. Brian Schatz (D-HI) and Rep. Peter DeFazio (D-NJ) have just submitted FTT legislation calling for an 0.1 percent tax to the current Congress. Earlier efforts over the last decade have gone nowhere, and any Democratic bill faces an uphill battle in the GOP-controlled Senate.

Timing is everything, though. And the nonpartisan CBO just gave out those big, beautiful numbers for precisely the tax that Schatz and DeFazio are proposing.